Last week, it was announced that the fiduciary rule will be permanently delayed. You may remember the fiduciary rule as the regulation that requires investment advisors to act in the best interest of their clients. Yes, I realize how ridiculous it is that a regulation needs to be created that makes investment professionals act in the best interest of clients, but unfortunately this is the financial industry. The fiduciary rule of course would have been a huge benefit to people needing investment advice, but would have hurt all of those investment brokers that make a living screwing over novice investors. It came as no surprise that this fiduciary rule was cut, as Trump sees protecting investors as an unnecessary regulation. It doesn’t hurt that brokerage firms spent millions lobbying against the fiduciary rule. So why does this rule help me and hurt you so much?
No question that the biggest benefactor is the guy locking people up in garbage variable annuities and non publically traded REITs. I’ve written before in this article, that if you are looking to get rich quick and have no experience in the finance industry, start selling annuities. It takes no time to get licensed and the commissions are huge. The only requirement is that morally, you don’t care about ripping off unsuspecting clients. The fiduciary rule was created so that these annuity and other commission based brokers would need to put the clients interest ahead of their own. Now, these brokers can go right back to fleecing retirees.
So, how could this rule possibly be good for fee-only fiduciary investment advisors like myself? First off, the best thing about this fiduciary rule, even though it never became law, is that more people are now familiar with a fiduciary. Previously, I would never have a prospective client ask me if I was a fiduciary. Now, I get it all of the time. The general knowledge that there are brokers that can sell products to benefit themselves and fiduciaries that have to look out for the client, is a good thing. I love being able to sell against commission brokers. It is a huge advantage to sit across from a prospective client and explain how I’m required to act in your best interest. Even better when we discuss that other guy you spoke with, yeah the guy selling you that ridiculous non-traded REIT, he’s not. If every financial advisor had to act in your best interest, I’d lose this huge advantage that I have. Trust me, acting in the clients best interest is the best thing I can sell.
It just so happens that on the same day the fiduciary rule was shot down, I got a call from a long time client. We have spent years, and countless hours of paperwork, to get rid of annuities and non-traded REITs that a previous broker sold him. He told me about another non publicly traded energy MLP that he bought in 2012. He bought it for $50,000 and figured it was worth at least that today but (conveniently) stopped receiving statements a couple years back. I mean how could it do too poorly, the S&P 500 is up over 115% since the beginning of 2012. Needless to say the client wasn’t happy when he found out his $50,000 investment is now worth a whopping $1,500. Oh and it would take him 6 to 9 months if he would like to pull his money out. If you are counting, the broker who sold him this ridiculous investment made around five grand (whom he never heard from again) and the client lost nearly fifty. This is why the fiduciary rule is so important. Yet, as long as their are brokers out there selling crummy commission based products, I’ll keep selling against it with solid fee-only investment advice. That’s a huge advantage to me.